Weekly Oil Catalysts For Downside

| About: The United (USO)
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Summary

Supply disruptions sent oil up so far this year.

Brexit could drive demand concerns.

Short term, we'd expect oil to be weak with markets and trade lower.

This week we expect oil to go lower (NYSEARCA:USO)(NYSEARCA:OIL). After a long run up from its lows (almost 80%) we think as the market sells off it will take oil with it. The main driver up this year was driven by supply concerns. We think, near term, the concern of global slowdown will take it down.

That said, we expect this to be a fluid process which is why we want to look at it on a weekly basis.

Supply Concerns Drove Oil Price This Year

We think most of the oil move higher this year has been driven by supply disruptions.

*Middle east

*Nigeria

*Canada

Here's how the EIA described it.

We are still running at high levels of supply disruption but not more than last year.

Even though recent news of disruptions has been a shrill, the amount actually falls somewhat inline with last year's levels, if not lower.

And the recent worries may be getting resolved (Zerohedge).

Here's the oil price. We think the main factor for getting the bounce was driven by supply disruptions.

That was then.

We think the near and present driver will be demand worry.

We see the major oil consuming nations all slowing and we think Brexit can make it worse.

We think as another fallout from the Brexit news, oil may have started a turn back down.

A shakeup in demand, like the UK pulling from the EU has sent economic risk waves throughout the globe.

Demand risk is obviously the other key element between oil's supply and demand.

Calendar, what we're focused on

We don't see any major OPEC meetings until November. In the meantime we'll focus on inventory reports and economic news out of the countries with the largest oil demand.

The major consumers of oil in order are US, China, Japan, India, Russia.

Here's perspective for the largest oil consumers (bbl/day).

US 19840000
China 9790000
Japan 4464000
India 3509000
Russia 3196000

Obviously by far the biggest drivers to oil should be the US and China.

The US and China have been slowing. Japan has been slow. India has been strong. Russia has been negative but may bounce as the price of oil can help.

The net of that would mean that there should be less oil demand.

June 28th : US GDP. Has been slowing which could mean less demand for oil. If the trajectory of the below chart continues the US would be in recession.

June 29th: Japan Industrial Production has been weak.

Japan has a ton of data on Thursday but generally we expect this to be weak based on their recent stagnant GDP growth (below).

China growth has been slowing

Here's China's GDP

June 27th After Market: China may make rate comments.

June 30th After Market: China PMI has been also slowing.

US Oil Inventories Remain High

June 29th US Oil Inventories/Cushing. While inventories have shown a slight tick down that could be due to seasonality.

Here is OECD inventories, which are also high.

Further Supply Risks Down The Road

War risk: Longer term we have to worry about supply constraints in the Middle East. Unrest or actions of war can obviously throw off the supply picture.

OPEC and Saudi Arabia: Major news came out last week that Saudi Arabia said they are ending their two year oil price war with the US.

That could mean that Saudi Arabia and OPEC could again tighten supply. The top three oil producers globally are the US, Russia and Saudi Arabia. Saudi Arabia has incredible power over OPEC. OPEC has not come to agreement to cut production. Now with Saudi Arabia changing its stance, we could see OPEC tighten further.

Saudi Arabia's threats did coincide with a major drop in the price of oil. Their new tone can change OPEC to a more unified group giving oil prices support.

The next major OPEC meeting we see is November 30th.

Currency News

Brexit has thrown many currencies into a spin.

The risk is to export driven nations that depend on a weak currency.

Japan's Yen strength is a signal for weaker exports. Exports make up 18% of their GDP. Their finance minister threatened to sell Yen as a sign of how important a weak Yen is to Japan's economic health. Risk to the health of the third largest oil consumer is a risk to oil.

Here's the Dollar dropping versus the Yen's strength.

We think this next chart may actually hold but Friday saw Dollar strength against the Euro. This can cause weakness in oil prices. Oil becomes more expensive to those that buy in dollars.

Technicals

Charts are in the eyes of the beholder, especially this one. But this is how we see it.

We had been waiting for a break down after a nice run up. We think the Brexit news may have been the catalyst to reverse course. We may be early in a trend change lower.

If it flips back up, we may have to respect the move to buy it back.

Conclusion

We expect global slowdown fears and stock market volatility lower to drag oil. Oil lifted this year led by supply disruptions. As they resolve we think weaker demand scenarios could take oil down.

Longer term though we have to watch Saudi Arabia that appears to have made a major change in their output stance which will affect OPEC. We also need to watch any further middle east unrest for other supply constraints.

Good luck and please be in touch. All of your comments teach US a ton. If you like our work please pass it along.

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